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Saturday, October 24, 2009

BSE Sensex Index Chart Pattern - Oct 23, '09

In last week's analysis of the BSE Sensex index chart pattern, it was observed that the upward momentum of the bull rally was slowing. There were negative divergences in the technical indicators and volumes remained lack lustre. I had advised caution and booking of partial profits.

On another holiday-shortened week, the Sensex hit a new high of 17457 on Tue, Oct 20 '09 - which turned out to be a 'reversal day' (i.e. a higher high but a lower close). Two days of mild correction was followed by a marginally higher close by the weekend.

Naturally, the question on every investor's mind must be: What now? Is this the beginning of the correction? Or, is it the pause before the next rise? A lot would depend on FII action. They were net sellers last week.

Let us look at the 6 months bar chart pattern of the BSE Sensex index to try and find some answers:-

The entire trading following the gap-up opening on May 18 '09, can be enclosed within a bearish 'rising wedge pattern'. The up-trend line connecting the bottoms made on Jul, Aug, Sep and Oct '09 was finally broken on the down side on Thu, Oct 22 '09. The index pulled back towards the trend line on Fri, Oct 23 '09.

For the bears, this is good news. As per trend line theory, break of a trend line means the end of the trend. The pullback to the trend line confirms the break, and is a good opportunity to sell.

But bulls can take heart from two factors. The downward break hasn't met the 3% whipsaw leeway yet, and needs to close below 16500 for the end of the up trend to be confirmed.

Also, the 20 day EMA has provided solid support so far. Even if the BSE Sensex drops below its short-term average, the 50 day EMA and the Aug '09 top of 16000 should provide good support.

Shorting the index is not advised till the level of 16000 is broken. A bout of FII buying next week may again take the index up towards the gap-analysis target of 17800.

What are the technical indicators signalling? The RSI is at the 50% level, which is neutral. The MFI is just above the 50% level, mildly bullish. The slow stochastic has dropped sharply below its mid-point, bearish. The MACD is positive, but has slipped below the signal line, mildly bearish.

Looks like the bears have a slight edge, and another 5% fall could be on the cards. That would take the index to the crucial support level of 16000.

Bottomline? The BSE Sensex index chart pattern is in a corrective mood. But the bears haven't quite got the upper hand yet. Buying not advised. Partial profit booking may continue.